If you’re anything like most business owners trying to close out the year and prep your tax filing this month, there are a number of holiday expenses you can deduct that could save you thousands of dollars. As a business owner, you know the importance of maintaining and strengthening your relationships with clients. One proven way of enhancing business relationships is giving business gifts.
By sending along seasonal gifts to your clients, you can help ensure these relationships continue to flourish in 2019, while also opening up a new opportunity for a tax write-off. What makes the most wonderful time of the year even more wonderful? The fact that certain types of gift giving can benefit your tax bill.
Like some tax deductions, there is a limit on how much you can deduct when spending money on business gifts. The only catch: The IRS allows a maximum $25 deduction for each person you’re gifting. That means all gifts to your client through the whole year – including holidays, birthdays, and other occasions – cannot exceed $25 to any one person. If you send a $10 bottle of wine to congratulate a customer on their new home, you have $15 left for their holiday gift. If you go over, then that portion is nondeductible. Also, if you give your client’s son or daughter a gift, that is also considered a gift to your client that can be written off.
Good news is that there is no limit to how many people you can give a $25 gift to. You might ask, why such a low limit? The $25-dollar limit that was established in 1954 was never updated for inflation. When adjusted for inflation, it comes close to $180.
To add further perspective, consider these costs in 1954:
- Car: $2,275
- Gallon of gas: 31 cents a gallon
- Postage stamp: 4 cents
- Minimum wage: $1.15/hr.
Incidental costs of making a gift:
Such costs aren’t subject to the $25 limit. For example, the costs of custom engraving on jewelry, packing, insuring and mailing a gift are deductible over and above the $25 limit for the gift itself.
What can you get for $25 these days? Well, you can get nice luggage tags, a pair of mugs, or a set of dessert dishes at Nordstrom. At Crate and Barrel, you can buy a set of holiday beer glasses, a picture frame, or vase. But are those really the kinds of gifts you want to give a client or business associate? How can you get around the $25 limit? Good news is there is some exceptions.
Note, the $25 limit applies only to gifts to individuals. It doesn’t apply if you give a gift to an entire company, unless the gift is intended for a particular person or group of people within the company. Such company-wide gifts are deductible in any amount, as long as they are reasonable. For example, a gift of a $200 reference manual to a company for its employees to use while doing their jobs would be fully deductible because it’s used in the company’s business.
If you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50.
This is great for business owners attending a lot of conferences. Imagine if you had to keep careful record to deduct every pen or mini soccer ball you handed out!
The rules for these promotional gifts are:
- Each item must be worth $4 or less
- Items must be marked clearly and permanently with your company name
- Items must be part of a collection of identical pieces that you give out widely
Meals vs. gifts expenses:
Another way to show your clients how much you appreciate them is to treat them to a meal or drinks. You can deduct meals costs for networking purposes. The IRS will allow you to claim 50 percent of these business expenses. Just remember to keep itemized receipts and notes concerning the clients with whom you conduct business at these meetings.
Generally, gifts from employers to employees are considered bonuses subject to FITW, FICA, and FUTA. However, gifts of nominal value, such as small Christmas gifts, are treated as tax-free de minimum fringe benefits.
A gift is considered de minimis if:
- The value is nominal;
- Accounting for the item would be administratively impractical;
- The gift is provided infrequently; and
- The gift is furnished to promote health, good will, contentment, or efficiency of employees
Merchandise vs. cash:
If an employer distributes items of merchandise of nominal value to employees, such as turkeys or hams, the value of those items will not be considered wages. However, if an employer gives cash, gift certificates, or similar items that are convertible to cash, the value is considered additional wages or salary, regardless of the amount. Cash is always taxable.
For example, Bing & Cherry, Inc. holds an annual summer picnic for its employees, providing all food, beverages, and entertainment. This year the company has decided to take all employees to an amusement park. The company will pay for everyone’s admission ahead of time. However, it also is planning on giving each employee $10 cash for rides and attractions not covered in the admission price. Although the value of the company’s annual picnic is normally not included in employees’ gross income, the $10 must be included, regardless of its nominal value and infrequency, because it is given in cash.
Merchandise provided by vendors. Some employers will have vendors provide substantial gifts to employees. Depending on how the gift is presented, the employers may still be required to tax and report these gifts.
For example, if a vendor actually presents the gifts to the employees, the vendor would be responsible for reporting the value of the gift and issuing a Form 1099 for any gift worth over $600. This may also be the case if the employee goes to the vendor to pick up the gift. However, if the vendor provides gifts to the employer, and the employer then gives them out in a raffle or other event, these gifts will probably be considered noncash wages subject to FITW, FICA, and FUTA.
If an employer pays all its employees the same specified percentage of their monthly salary as a Christmas gift, the gift is paid as a result of the employment relationship and is subject to employment taxes.
Track and document:
To the extent your business qualifies for any of these exceptions, be sure to track the qualifying expenses separately so that a full deduction can be claimed.
In addition, you must retain documentation of the following:
- Cost of the gift
- Date of the gift
- Description of the gift
- Business purpose of the gift
- Business relationship with the person to whom you gave the gift
Indirect vs. direct gift:
Also, the IRS has a subcategory – the government subdivides business gifts into two categories: direct gifts and indirect gifts.
- Direct gifts are given directly from the giver to the recipient with no middleman or third-party recipient. A direct gift is given to a single individual for a job well done.
- Indirect gifts are given to an individual by way of another person.
If your sweet grandma gave you $20,000 for Christmas, how much tax do you pay on that? Nothing. Grandma could give you 20 million and you wouldn’t owe a dime in taxes. The recipient isn’t taxed, it’s the giver who winds up with the tax bill. Just about anything you give away could be subject to gift tax.
But there are exceptions:
- There are no deductions for personal gifts. However, if the total amount of annual gifts to any person is more than $15,000, you will have to file a gift tax return with the IRS.
- Pay tuition or medical expenses for anyone – as long as you pay it directly to the medical or educational institution. No tax will be due.
- Gifts to political organizations are not subject to gift tax, nor are they tax deductible.
Keep in mind, if you and your spouse both give gifts, both of you are treated as one taxpayer. It doesn’t matter whether you have separate businesses, are separately employed, or whether each of you has an independent connection with the recipient. If a partnership gives gifts, the partnership and the partners are treated as one taxpayer.
Contact us – Semaphore will help you:
If you have any questions regarding the types of gifts or gift-giving situations that may qualify for a full deduction or how to properly isolate and account for them in your records, please contact Semaphore.